Tepco seeks $25 billion from banks

The operator of Japan's Fuku-shima Daiichi nuclear-power plant is seeking around $25 billion in loans for repairs at power stations damaged by the March 11 earthquake and tsunami.

But questions remain on how much liability the utility, rather than central government, might face in compensation claims down the road.

For now, the nation's major banks appear willing to provide most of the cash for repairs. The loans sought by
Tokyo Electric Power
Co.
are so substantial that they would require the cooperation of Japan's entire banking sector, according to people familiar with the situation. A Tepco spokesman said the utility is considering various ways to raise cash, including asking for loans.

As the country's biggest power supplier struggled to regain control of the damaged reactors at the Fukushima Daiichi plant, radiation fears rose Wednesday as Tokyo warned that iodine exceeding permissible levels for infants had been detected in tap water in northern parts of the capital.

With the government estimating that the disaster's total cost to the national economy could reach as much as ¥25 trillion, Tepco's balance sheet is facing greater scrutiny. Although Cabinet Secretary Yukio Edano said Monday that Tepco will compensate farmers whose crops and produce around the nuclear plant were contaminated with radioactive particles, it may be difficult to determine exactly where liability lies.

According to the country's 1961 Act on Compensation for Nuclear Damage, the operator of a nuclear facility won't be responsible for damage caused by its reactors if the damage was the result of "a grave natural disaster of an exceptional character." That means insurers of the nuclear plant are likely to be exempt from payment.

"The nuclear-type damage losses should be relatively small for the insurance industry, with the majority of these picked up by the Japanese government," said
Mark Kellock,
who covers Asia's insurance sector for Barclays Capital in Hong Kong. Total insurance losses range from $15 billion to $35 billion, according to early estimates by industry experts.

A government official for Japan's nuclear-power policy office confirmed that the letter of the law indicates the government might help cover compensation costs resulting from the Fukushima Daiichi crisis. But compensation by the government would take time, as the scope of the damage isn't fully known, and the potential range for compensation claims hasn't been established.

Yoshiaki Takaki, the minister of education, culture, sports, science and technology, said in Parliament this week that Tepco also will have to take some responsibility. "We have to consider a relief for the people in the affected area as the first priority," he said.

For any nuclear-power company to operate in Japan, it must be registered with the General Insurance Association of Japan and must join an insurance plan run by the Ministry of Education, Culture, Sports, Science and Technology. But the insurance association doesn't cover earthquake and tsunami-related damages or claims, a spokesman for the group said.

The government insurance coverage at the troubled Fukushima reactors would be for ¥240 billion. Under legal provisions that haven't been tested in practice, if third-party claims were to exceed this amount, the company could seek assistance from the government, with a parliamentary vote deciding how much of the remaining claims would be shouldered.

Whatever the government does, Tepco still will have to find cash not just for repairing its quake-hit power plants and compensating farmers, but also to cover bonds maturing in the next fiscal year that are valued at about ¥550 billion. But Tepco's ability to issue new bonds was hit by credit-rating cuts and new equity issuance was made all but impossible after the March 11 disaster. That means the company's options will be limited to either commercial or public lenders. Tepco's share price has fallen 50% since the earthquake, valuing the company at ¥1.69 trillion.

Despite Tepco's significant operating troubles, the banks likely will offer the power company a lifeline because they believe it has retained a relatively sound balance sheet in recent years, industry observers say.

And Japanese banks, which have a substantial amount of cash on hand, are likely to lend amid otherwise weak corporate demand for loans. The balance of total lending at Japan's three major banks stood at about ¥180 trillion as of December.

Still, while lenders may be confident in Tepco's prospects, investors clearly have concerns. The company's credit-protection costs rose sharply last week. Five-year credit-default-swap spreads on Tepco debt widened as much as 4.25 percentage points on March 16 from the previous trade of 42 on Feb. 3.

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